Adios FAS!

I just sold all of my FAS and cancelled all of my FAS buy orders.

The more I read about the fundamentals of the financial sector going forward, the more I am convinced that the FAS will not return to its post crash high of 40ish even if the SP500 gets back to 1500 over the next few years (which I don't see happening either).

After the SP500 and the FAS bottomed in March 2009, the FAS ran up to around 40. Now banks have to discontinue their proprietary trading activity, which historically has been a large profit center. Additionaly, they will have to increase their capital reserves, which will ultimately decrease their return on capital. For the overall health of the financial system, these are probably prudent things to do. However, market players will probably no longer pay higher premiums for this sector, and it will be much harder for the FAS to return to its spring 2010 highs (when market participants were not factoring these fundamental issues in).

I am still interested in buying the FAS if the fear of the financial system collapsing returns to the forefront of investor psychology. If the financial system does collapse, in my view it does not matter what paper assets anyone owns, they will be worth significantly less if not worthless. Based on this idea then, buying the financials into a market panic about the financial system crashing, is almost a risk-less trade.

With the FAS currently trading in the 12's, I do not find it a compelling value. There is always the chance that the Europeans create a multi-trillion dollar fund to backstop sovereign debt issuers and holders, which could send the FAS soaring in the intermediate term. But I also think there is just as good a chance that in the longer term, this fund will not solve the fundamental issue of too much debt held by nations, corporations and consumers. Buying the FAZ right now does not make a lot of sense either, because if the European fund materializes, then the FAZ could take a huge hit.

In any case, I think that at some point in time within the next few years, the FAS will retest its 2009 lows (around 4). When it starts trading in the mid single digits, I will get more interested in it.

Trading the FAS and the FAZ over the past 3 months has helped increase my IRA by 26%, a pretty good return for a short period of time. I am going to keep watching how things play out and keep my powder dry. I will also start identifying other sectors that have 3x leveraged long and short ETFs, and see if I can spot some intermediate to long term opportunities in them.

According to ECRI, the US is probably in a recession right now, and I believe the 2012 US Presidential election is going to decrease investor confidence that the US can get its budget and debt situation in order.

The next 12-30 months are going to be very interesting from a social, financial and political standpoint. Paying attention to what is going on will be important.

Disclosure: No positions in any of the securities mentioned.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

Economists are useless unless their names are Lakshman or Anirvan.

I generally find that most economists are useless and do not add anything of value to the conversation. Paying attention to lagging indicators only tells me where I have been (ie, revisions to Q Economic activity), kind of like looking into a rear view mirror. Paying attention to coincident indicators (ie, Monthly Retail Sales) only tells me where I currently am, and any fool can do that.

But looking into the future, and seeing where the economy is probably going, really adds something to the discussion. Lakshman Acuthan and Anirvan Banerji of the Economic Cycle Research Institute use leading indicators (ie. SP500, Weekly Unemployment Claims, Mortgage Application activity, Commodity Prices, etc) to identify turning points in the economic cycle. Yesterday, Lakshman stated that a US recession can not be avoided.

Jason Goepfert at Sentimentrader crunched some numbers on the how much the market falls during recessions, and found a median decline around 25% in the SP500, with the largest decline around 55%.   The SP500 is already down about 15% from its summer high, so some of the stock market fallout has already occurred.

I love the work that Lakshman and Anirvan do at ECRI, and that Jason does at Sentimentrader. I have been following them for about 10 years. Their research, and how I have been able to apply it to my trading, has been a big part of my trading success.

Speaking of trading, my order to purchase a second lot of FAS just above Thursday's high was not hit. I have edited the order such that a break above Friday's high (11.95ish) or a drop down to 10.35 will get me long a second lot of FAS.

The Volatitility Index (VIX), looks like it is setting up for a retest of it's summer high around 48. If there is not a significant positive news event out of Europe over the next few days-weeks, I would expect the market to be trading lower over that period, with an increase in the magnitude of the swings. It might be good to make a quick run to CVS and pick up some Dramamine. Having said that, I am looking to buy that weakness in piecemeal fashion, rather than sell it. According to the Stock Traders Almanac, the best 6 months of the year tends to begin with the September/October low. Monday is the first trading day of October.

Disclosure: Long FAS.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

Articles of Interest, Friday 9/9/11

Stock Traders Almanac: Sector Seasonality is on Track

Todd Harrison: The Market is speaking, are you listening?  and this was written two weeks ago!

ECRI: WLI ticks up, but growth rate weakens

Stock Traders Almanac: Hemline Index still Bearish

ECRI hits it out of the park again...

Is it really different this time? A cyclical perspective

ECRI: 'Recovery and Jobs Growth are Underway'

ECRI: 'Recovery and Jobs Growth are Underway'

"...the very literal near-term reading is that we have a recovery. It is not going to falter in the next few quarters, deflation is off the table, and we don’t have surging inflation in terms of consumer prices. For the time being, that’s not a bad position to be in..." -Lakshman Acuthan, 12/22/09

ECRI: More frequent business cycles ahead

ECRI: More frequent business cycles ahead

ECRI: A Reply to Paul Krugman

ECRI: A Reply to Paul Krugman

ECRI: There really is a 'V' in Recovery

ECRI: There really is a 'V' in Recovery

'...The institute compiles a set of economic indicators that it calls the Weekly
Leading Index, and on Friday it announced that the index is at a record high.
That means, Banerji said, a stronger recovery than we saw after the recessions
of 2001 or 1990-91 with little risk of a double-dip...'

'"With the economy just coming off the bottom of the business cycle, things look

pretty bleak outside your window," says Anirvan Banerji, director of research
at the Economic Cycle Research Institute in New York. "The reality of where we
are, though, should not blind us to the forward-looking indicators of where we
are headed."'

ECRI: The Great Recession and Recovery

ECRI walks through their recent calls for a recession and then a recovery...

ECRI: When to put Money Under Your Mattress

ECRI News Professional Reports

ECRI: "U.S. Economic Recovery is 'Far From Fragile'"

• sparked by worse than expected chicago pmi data, market participants on the whole are behaving pessimistically today...
• i continue to believe in the rally, and as noted below, have been a buyer of weakness...
• last week, ECRI said the following: U.S. Economic Recovery is 'Far From Fragile':
  

"A weekly gauge of future U.S. economic growth climbed higher in the latest
week, while its yearly growth rate reached a new all-time high, reaffirming
projections of a brisk, uninterrupted recovery..."

"...Last week, ECRI Managing Director Lakshman Achuthan told Reuters that the
group expects an "unstoppable" recovery with "no relevant roadblocks." Fears
over mounting unemployment, debt-laden consumers, and dips in recovery are
typical of recessionary times, he said.

"With WLI growth climbing to a fresh record high, the economic recovery is far from fragile," Achuthan said on Friday..."

Disclosure: Long NQZ09, Long ESZ09.

***remember this is an illustration of what i am trading and my thinking...my trading plan may change without notice...this is not a recommendation for you or anyone else, to buy or sell this or any other security...trade at your own risk***

ECRI's radio interview discussing the US business cycle over the past 100 years

http://www.businesscycle.com/news/press/1568/

ECRI's WLI growth rate ratches up again

Economic Cycle Research Institute's news release: Though Analysts Clash, Firm U.S. Recovery at Hand

"...The index's annualized growth rate ticked up to 17.5 percent after hitting a 26-year high of 14.3 percent last week, which was also revised higher from 13.4 percent.

It was the highest yearly growth rate the index has seen since the week to July 29, 1983, when it was 17.8 percent.

"It is high time to break from the herd of pessimistic analysts, who will continue to bemoan economic weakness long after the Great Recession is history," said Lakshman Achuthan, Managing Director at ECRI.

Achuthan told Reuters last week that he expects the recovery to take hold at a stronger pace than any the U.S. has seen since the early 1980s..."

ECRI's WLI Growth rate runs up to a 26 year high.

Economic Cycle Research Institute's Weekly Leading Index (WLI) growth rate has run up to a 26 year high:

"...Meanwhile, the index's annualized growth rate leapt to a 26-year high of 13.4 percent from last week's five-year high of 10.4 percent, which ECRI originally reported at 10.5 percent.

It was the index's highest yearly growth rate reading since the week to Aug. 26, 1983, when it stood at 13.9 percent.

"With WLI growth surging, the odds are rising that the early stage of this economic recovery will be stronger than any since the early 1980s," said Lakshman Achuthan, Managing Director at ECRI.

Achuthan recently told Reuters that the national recovery would be stronger than many expect, though signs of such strong growth will not be apparent until sometime next year..."

http://www.businesscycle.com/news/press/1529/

http://www.businesscycle.com/

ECRI's Weekly Leading Index (WLI) Growth Rate Rises Again

"Following a 28-week upturn, WLI growth has broken into positive territory for the first time in over 22 months -- an affirmation that an end to the recession is at hand," said Lakshman Achuthan, managing director at ECRI.

http://www.businesscycle.com/news/press/1466/

http://www.businesscycle.com/home/

ECRI's Weekly Leading Index (WLI) Growth Rate Rises

"With WLI growth rocketing up almost 30 percentage points in six months, it's virtually pounding the table about the recession ending this summer," said Lakshman Achuthan, managing director at ECRI.

http://www.businesscycle.com/news/press/1461/

http://www.businesscycle.com/home/

ECRI's Weekly Leading Index (WLI)

Though my daytrades can be measured in minutes/hours, and my swing trades can be measured in hours/days, and my investments can be measured in weeks/months, I still pay attention to the overall fundamental outlook of the US Economy.

I use the Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI: http://www.businesscycle.com/) to help form my longer term view of where I believe the US Stock Market is headed. ECRI updates the WLI with a free publicly available news release every Friday morning (http://www.businesscycle.com/news/press/).

The premise of the WLI is that there is some economic data that sends signals (Leading Indicators) about upcoming economic activity that may suggest growth or contraction in the coming quarters. ECRI has built models with data that go back to the early 1900's, so the assumption is that the models are robust and contain not just a descriptive value of the current enviroment, but also a predictive value of the future environment. And isn't it the future that we as traders/investors are most interested in?

If you want to see what kind of economic growth may be ahead of us, then follow ECRI's WLI.